What it is
A stock split is what happens when a company increases the number of its shares. Instead of adding to the stocks already in the market, those shares are instead “split” into several shares, with the price being split as well.
Take, for example, a company whose shares are being bought at P999. If these were split at a 3:1 ratio, you would have three shares valued at P333 after the stock split.
A stock split is typically done to increase the liquidity of the shares. That’s because buying and selling of a company’s stocks can slow down once they reach a certain price point, since investors would have to spend a lot to buy a large number of these shares.
Since the stock split affects the prices in addition to the amount of shares that investors hold, it makes it easier to start small and just build up the stocks of this company in a portfolio.
What it means for you
If a stock split happens to shares that you own, it isn’t a cause for concern. That’s because there won’t be a change in the total value, just in the price of each individual share (but you’ll end up having more than you did before).
If you don’t currently own any shares of a company that is undergoing a stock split, you might find that this is a good opportunity for you to buy some if you feel that they have potential to rise in value in the future.
The opposite of a stock split is a reverse stock split. In this, several of a company’s shares are combined, and their prices do the same.